BIS gold swaps soar from zero to record high

Is the "central bank of the central banks" again striving to facilitate supply to suppress the gold price?

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By Robert Lambourne
Saturday, September 16, 2017

Disclosures in the August statement of account published by the Bank for International Settlements indicate that during August the bank increased substantially its use of gold swaps.

An estimated 130 tonnes of new gold swaps were made last month, worth about $5.9 billion at the month-end gold price, and the total level of gold swaps at the end of August was close to 500 tonnes.

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This is the BIS' highest level of gold swaps recorded since the bank first reported the use of gold swaps in its annual report for the financial year ended March 31, 2010.

A review of the previous use of gold derivatives by the BIS reveals that the transactions in the year ending March 31, 2010, were far more substantial than anything done by the bank in the years immediately before.

The use of gold swaps reported by the BIS in recent times is summarized below:

March 2010: 346 tonnes

March 2011: 409 tonnes.

March 2012: 355 tonnes.

March 2013: 404 tonnes.

March 2014: 236 tonnes.

March 2015: 47 tonnes.

March 2016: 0 tonnes.

March 2017: 438 tonnes.

As this table shows, the use of gold swaps by the BIS fell considerably from 2013 to zero in March 2016. In the financial year ending in March 2017 a new year-end peak of 438 tonnes was reported.

In its annual report for 2017 the BIS offered no explanation for its renewed use of gold swaps. By contrast, back in 2010 the BIS discussed its gold swaps with the Financial Times in an article published July 29 that year. BIS General Manager Jaime Caruana said the gold swaps were "regular commercial activities" for the bank:

"Some analysts speculated that the swap deals were a surreptitious bailout of the European banking system ahead of last week's publication of stress tests. But bankers and officials have described the transactions as 'mutually beneficial.' ...

"'The client approached us with the idea of buying some gold with the option to sell it back,' said one European banker, referring to the BIS.

"Another banker said: 'From time to time central banks or the BIS want to optimize the return on their currency holdings.'"

None of these comments in the FT article focused on the gold market itself but implicitly accepted that gold was being used as collateral to support dollar loans to commercial banks.

An alternative explanation -- that the swap transactions were initiated by the BIS to place more unallocated gold in the hands of certain central banks -- seemed plausible, since the gold market was tight at the time.

Perhaps not conicidentally, the BIS has renewed its use of gold swaps since March 2016 just when many commentators consider gold market conditions to be tightening again, as they were in 2010 and 2011.

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Robert Lambourne is a business executive in the United Kingdom who consults with GATA about the involvement of the Bank for International Settlements in the gold market.
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